Institutions have continued to warm up to commodity trading advisers, a strategy that has historically had something of a bad rap with this group.
A record 1,067 institutional investors had investments in CTAs in 2015, up from 1,017 in 2014, according to a new report from London-based hedge fund industry research firm Preqin. What’s more, 29 percent of all hedge fund investors said they planned to boost their exposure to CTAs this year, compared with just 5 percent who said they planned to reduce their commitments.
The recent surge in interest in CTAs, however, underscores investors’ difficult, clumsy and perhaps uncomfortable relationship with the strategy. CTAs invest in futures and options tied to a wide variety of markets, ranging from stocks and bonds to commodities and currencies. According to Preqin, 65 percent of the CTA vehicles invest in the currency markets, 58 percent trade stock indexes, and slightly less in energy, grains and metals. There are now 1,191 CTA funds, according to Preqin. Some of them rely on humans to make investment decisions, but a vast majority of them rely on computers to drive decisions. Roughly two thirds deploy trend-following strategies, some based on short-term indicators, others riding longer-term trends.
Investors like the asset class because CTAs have virtually no correlation to the stock market. Their heyday was 2008, during the financial crisis, when most CTAs made money and many posted double-digit gains.
However, when the bull market took off in early 2009, many CTAs were left behind. Many of them lost money for one or more years, while stock pickers and bond bulls were racking up big gains.
In 2014, CTAs enjoyed a sort of revival, posting 10.85 percent gains, on average, according to Preqin. These gains apparently triggered the recent surge in interest.
But in 2015, CTAs posted, on average, a 0.8 percent loss. Many high-profile funds suffered much bigger losses.
Yet 69 percent of investors interviewed at the end of 2015 said their CTA portfolios had met their performance expectations for the year, the second-highest proportion of any leading hedge fund strategy, Preqin points out. This year, CTAs got off to a very strong start. Thanks to sharp gains in January during the stock market’s big sell-off, CTAs posted a 1.52 percent gain in the first quarter.
However, as risk tolerance has grown in recent weeks and months, the stock market is flirting with its old highs, while CTAs are falling back again. In May, CTAs were down by 2.3 percent on average, leaving them off by 2.9 percent for the year, according to a recent report from Paris-based fund manager Lyxor Asset Management.
“All gains delivered by the bearish long term players in early April were offset when risk appetite rekindled,” Lyxor explains in the report.
Lyxor says that CTAs’ defensive position entering May — long the fixed-income market and short energy — suffered from the rise in sovereign yields and the sharp oil rally. “Losses remained nevertheless contained as positioning was markedly less aggressive in April,” it adds.
On the other hand, CTAs with big positions in foreign exchange fared well from shorting the U.S. dollar, which began weakening amid “a dovish Fed tone,” Lyxor reports. Many traders were short the dollar versus the currencies of countries heavily dependent on the commodities markets as well as the Japanese yen.
Looking at individual funds, the International Standard Asset Management systematic program, managed by Stanley Fink’s London-based ISAM, was down more than 6 percent for the year through May. In January, however, it was up 5.7 percent.
Systematica Investments’ BlueTrend fund is down 2.55 percent through May. It was up 7.5 percent in January.
David Harding’s Winton Futures Fund is off 4 percent through May. It rose 2 percent in January. It is managed by London-based Winton Capital Management.
Man AHL Diversified, managed by London-based Man Group, was down nearly 3 percent in May and roughly the same amount for the year. Remember, this fund lost money in four of the five previous years.
The Aspect Diversified fund, managed by London-based Aspect Capital, is down about 6.5 percent for the year through May.
However, not everyone is losing money. Roy G. Niederhoffer Diversified Offshore Fund, managed by New York–based R.G. Niederhoffer Capital Management, was up nearly 7 percent through May.
The very volatile CCP Quantitative Fund - Aristarchus program, managed by Cambridge, UK–based Cantab Capital Partners, was up 0.32 percent through May. In January alone, it had surged 8.4 percent.
